Pre-tax vs. after-tax medical premiums

For employers and employees alike, health insurance premiums are often one of the largest monthly expenses. As healthcare costs continue to rise, many people look for ways to reduce what they pay. One of the most effective ways to save is through tax-advantaged health benefits.

How much you save depends on whether you pay your health insurance premiums with pre-tax or after-tax dollars. While both options can offer value, they work differently.

In this article, we’ll explain the difference between pre-tax and after-tax medical premiums and how health reimbursement arrangements (HRAs) can help combine the advantages of both.

In this blog post, you'll learn:

• The types of health coverage employers offer.
• How the IRS taxes health insurance benefits.
• How an HRA can help reduce health insurance costs.

What are pre-tax medical premiums?

First, let's talk about pre-tax medical premiums. A pre-tax medical premium is a health insurance premium your employer deducts from your paycheck before any income taxes or payroll taxes are withheld and then pays that amount to the health insurance provider on your behalf.

You must enroll in your employer-sponsored health insurance plan or a Section 125 arrangement to pay your premium with pre-tax money.

Employer-sponsored plans with qualifying pre-tax premiums include the following:

• Major medical coverage
• Supplemental/voluntary coverage
• Healthcare spending account contributions, such as health savings accounts (HSAs) and flexible spending accounts (FSAs)
• Employee payroll contributions to HSAs are pre-tax, while employer contributions are tax-free (not salary-reduced)

You can confirm if your health premiums are pre-tax by viewing your pay stub and looking for a column titled “Deductions” or something similar. If your health premium is in this column and your employer deducts it from your gross pay, it's a pre-tax premium.

Your employer may also offer you tax-free employee benefits like a health reimbursement arrangement (HRA). While employees don't contribute to an HRA, all reimbursements for qualifying medical expenses, including insurance premiums, are tax-free as long as you have qualifying coverage with minimum essential coverage (MEC). The important distinction here is that HRAs are tax-free, not pre-tax. Your employer doesn’t deduct money from your paycheck to fund the benefit. However, you and your employer can establish a Section 125 plan to allow for pre-tax deductions for any excess off-exchange premium amount that your HRA doesn’t cover.

Tax deductions for pre-tax premiums

When you pay health insurance premiums on a pre-tax basis under a Section 125 plan, those dollars aren't included in taxable income for federal income taxes or in wages subject to Social Security and Medicare tax.

For example, someone in the 22% federal income tax bracket¹ who also pays 7.65% in Federal Insurance Contributions Act (FICA) taxes could avoid nearly 30% in federal income and payroll taxes on each dollar of pre-tax premium contributions compared with paying after taxes.

You can also reduce the amount of taxes that you owe with exclusions, deductions, or credits. These three subsidies are slightly different, but all boast big advantages. Essentially, deductions and exemptions both reduce your taxable income, while credits reduce your tax.

After-tax medical premiums

Next, let's talk about after-tax medical premiums. If you don't want to participate in your employer's pre-tax plan, or if your employer doesn't offer a pre-tax plan, you may be able to deduct your medical premiums on an after-tax basis.

Unless you have one of the eligible healthcare spending accounts, any copays, prescription costs, and payments you make before meeting your deductible are also considered after-tax medical expenses.

Individually purchased plans with qualifying after-tax premiums include:

• Major medical coverage, such as purchasing individual health insurance through the Health Insurance Marketplace
• Supplemental/voluntary coverage, such as accident or disability insurance

You can drop coverage that's paid with after-tax dollars at any time, so a good reason to go this route is if you anticipate dropping the coverage and enrolling in another plan in the middle of the year because you qualify for a special enrollment period (SEP).

Tax deductions for after-tax premiums

While different from pre-tax premiums, after-tax plans can still offer some savings. For example, you can still list premiums as an itemized deduction² when you file your income taxes for all medical expenses and premiums that exceed 7.5% of your income. Additionally, most self-employed taxpayers (including business owners) can deduct health insurance premiums³ using Schedule 1 for Line 16 on Form 1040.

If you paid your premiums with pre-tax dollars, you can’t also claim this deduction since you already received a tax break when your employer deducted your premium from your paycheck. This prevents double tax benefits. The pre-tax option allows you to receive the full tax benefit because all your premiums are tax-free. Additionally, you can't include premiums for coverage paid with pre-tax dollars⁴ or that you were eligible for under an employer-sponsored plan.

HRAs deliver pre-tax benefits with after-tax flexibility

An HRA is an employer-funded, tax-advantaged health benefit that allows employees and employers to save on medical costs. Your employer sets aside a specific amount of tax-free dollars for you to pay for your healthcare expenses every month.

With a stand-alone HRA, such as an individual coverage HRA (ICHRA) or a qualified small employer HRA (QSEHRA), you buy an individual health insurance plan with your own money. Then, your employer reimburses you for your monthly premiums and other eligible out-of-pocket medical expenses up to the set allowance amount.

HRA eligible expenses include:

• Monthly premiums for dental and vision coverage
• COBRA premiums
• Long-term care premiums
• Emergency care
• Preventive care

The reimbursements for medical care are tax-free as long as you have MEC and otherwise qualify to participate in the benefit, so you get the same tax benefits as you would with a traditional pre-tax plan. In other words, employees don't need to claim an income tax deduction for an expense reimbursed under the HRA.

Moreover, you'll also get the benefits of an after-tax plan. You choose the plan that works best for your needs from the Health Insurance Marketplace or the private exchange. Because your insurance plan isn't tied to your employer, only the HRA is, you can take the individual plan with you if you leave your employer. However, if you leave your employer, you lose your allowance because, unlike an HSA, HRA funds stay with the employer.

Conclusion

If your employer offers a health plan as part of their employee benefits package, you'll be able to pay for premiums on a pre-tax basis. This saves you money on income and payroll taxes. If you purchase your own individual plan, you'll have more flexibility but will pay more taxes. If you have a stand-alone health reimbursement arrangement (HRA), you can get the best of both worlds by selecting an insurance plan that works for you and receiving an allowance for tax-free reimbursements.

PeopleKeep doesn't provide tax or legal advice. This article is for informational purposes only. Reach out to a tax professional if you have further questions.

References

1. IRS
2. IRS
3. IRS

This article was originally published on November 6, 2020. It was last updated on January 20, 2026.